| Description |
In this dissertation, I consider effects of two corporate policies on shareholder wealth. First, I examine whether paying high dividends in an economy such as the United States, where tax on dividend income is higher than tax on capital gains, results in higher stock required rate of return to compensate investors for higher tax burden. Higher required rate of return, in turn, lowers equity valuation and decreases shareholder wealth. This view is supported by the positive relationship between dividend yield and stock return in the U.S. data. However, I document the above positive relationship in the Hong Kong market, where neither dividend incomes nor capital gains are taxed. My result shows that there are unknown factors that affect both stock required rate of return and dividend policy. In this case, paying high dividends might be a part of an optimal corporate policy, and thus does not necessarily decrease shareholder wealth. Second, I examine the question of whether the practice of using peer groups in setting Chief Executive Officers' (CEO) compensation results in unjustified pay, and thus transfers shareholder wealth to the CEOs. I examine this issue using the mandated disclosure of compensation peers that began in 2006. Although peers are largely selected based on characteristics that reflect the labor market for managerial talent, I find that peer groups are constructed in a manner that biases compensation upward, particularly in firms outside the Standard & Poor's (S&P) 500. Pay increases close only about one third of the gap between the pay of the CEO and the peer group, however, suggesting that the wealth transfer to the CEOs is relatively small. |
